What an offtake agreement covers
Most offtake agreements set out the same core terms.
- Product and quality specification.
- Volume: a fixed amount, a share of output, or a minimum and maximum.
- Tenor: how many years the contract runs.
- Price: a fixed price, a formula linked to a benchmark index, or a floor and ceiling.
- Delivery point and terms, often using Incoterms such as FOB or CIF.
- Payment terms and credit support, such as a letter of credit or guarantee.
- Force majeure, termination rights, and dispute resolution, often international arbitration.
Take-or-pay vs take-and-pay
Under a take-or-pay contract, the buyer must pay for the agreed volume whether or not it takes delivery. This gives the producer the most certain revenue, so lenders tend to prefer it.
Under a take-and-pay contract, the buyer pays only for what it actually takes. Revenue is less certain, so lenders look harder at market demand and price.
What lenders check
Lenders test whether the contract revenue can repay the debt. They look at the credit quality of the off-taker, whether the contract runs at least as long as the loan, how price risk is shared, and what happens on default or early termination.
In many African projects, the currency of payment also matters. A contract paid in US dollars or euros can reduce currency risk for foreign lenders.
Offtake agreements in power: the PPA
In electricity, the offtake agreement is usually called a power purchase agreement (PPA). The buyer is often a state utility. Lenders may also ask for a government support agreement or guarantee where the utility's credit is weak.
Frequently asked questions
Who is the offtaker in project finance?
The offtaker is the buyer that signs a long-term contract to purchase the project's output. In power it is often a state utility or a large industrial user. In mining it is often a trader, smelter, or refiner. Lenders rely on the offtaker's payments to repay the project's debt.
Is an offtake agreement required to get project finance?
Not always, but for most mines, power plants, and processing projects, lenders expect contracted revenue from a credible buyer before they lend.
What is a prepayment offtake?
A structure in which the buyer pays part of the price in advance, giving the producer funding, and is repaid through future deliveries.
Related
General information, not investment, legal or tax advice. Facts are from the public sources listed and may change.